John - I'm not a realtor and don't have any financial interest in your decision, but my wife and I have two children, were looking in the under $900k bracket in the Menlo-SJ area, and settled on the Cambrian neighborhood south of Hwy 85 near Leigh High School. We've been living here for two years and are in general satisfied with our choice. We're financially-conservative buyers and aren't terribly impressed with California hype generally (the schools everywhere in Calif. are poor compared to schools in most of Europe and east Asia), and would rather buy low and steadily upgrade our house than pay absurd prices for someone else's design choices.
Here are our personal impressions of various neighborhoods, moving from North to South:
Menlo Park and Palo Alto: absurdly overpriced; very poor quality of houses under $1m; schools are overrated; bad crime problem as you get closer to Hwy 101.
Los Altos: nothing except townhomes under $1m. In the next life, maybe.
Cupertino: >75% Asian-- and not just Asian, not just east Asian, but overwhelmingly drawn from one island off the coast of China (Taiwan). Your mileage may vary but we found this situation very uncomfortable. Not a good way to raise a child, we think, in what is (outside Cupertino) perhaps the most diverse metro region in the western world.
Sunnyvale: a better bet financially but generally poor quality housing. Mediocre schools. Weird mix of old-time rednecks/Okies and Indian engineers.
Campbell: crummy schools, many apartment complexes (read: noise, transients, potential for crime).
Saratoga: overrated schools. No houses under $1m worth looking at.
Los Gatos: Excellent schools. You may find something under $1m if you look far and wide, but it's not likely to be nice or updated. Los Gatos downtown is lovely. If you have a chance to live close to downtown, grab it with both hands.
San Jose (Cambrian/Campell Union School District): good schools, excellent housing value, up and coming areas (stay away from Camden Ave; keep close to either Los Gatos border or Leigh HS). Good teachers. Main reason that API scores are lower than Los Gatos is the higher % of uneducated campesino families in Campbell Union School District (about 18% vs less than 5% in LG).
San Jose (Almaden area): very good schools, okay housing value. Better API scores than Campbell Union mainly because of higher % of Asian students (ca. 30% Asian in Almaden vs 15% in Campbell) and lower % of uneducated campesinos. One big drawback if you work on the Peninsula: you'll have a brutal commute to Palo Alto or anywhere north on Hwy 85.
In sum, your best strategy is to go for Los Gatos if you can find a special situation or distressed seller and if not, then either Campbell Union /Leigh HS area or Almaden. Keep in mind that if, like us, you're pretty sure you'll do private schools for the upper grades, then you'll do well to stick with Campbell Union SD for elementary school and save HUGE amounts on your mortgage. You can find an excellent 1600 sq ft. house near Leigh HS for under $850k.
A final word of advice: do not listen to realtor BS about the schools. The API score is basically an indication of the % of super-educated asian immigrant families (raises the score markedly) and the % of semi-literate mexican immigrant families in the school. It says little about the quality of the school itself or of the neighborhood's composition. Los Gatos and Cupertino and a few schools in Almaden and Campbell Union are the only districts we've found that have any real rigor or high standards.
Best of luck,
T and M